I think most people can agree that our federal student aid-system is badly broken. It’s not that the program was poorly designed, but instead that the program was designed for a different era, and for a different student population, so it no longer works for the population we need to serve. The new “majority” student is more likely to be a person who is working at least 20 hours a week while attending college part time, perhaps while also caring for children or parents, and maybe even taking a semester or two off along the way to save for the next semester or deal with some personal issue.
How do we design a financial aid program that better serves the needs of all students, that respects the ability of adults to make decisions for themselves and that provides adequate return to the taxpayer for his or her investment in others?
I would argue that we might look to the Australian system of student aid for guidance on how to develop a better plan. In Australia, students each know in advance how much money is in their student-loan “account” so to speak. They know that when the money runs out, government support is over (unless the student is moving on to professional school, for example, in which case supplemental funds are made available). This means that the student has the incentive to make good decisions, stick with the program, and complete their studies in a timely manner. In other words, there is no such thing as a stipend runner who simply stays in the system for as long as possible to keep collecting student-aid rebates and avoid entering the repayment period.
Australian student loans do not have interest associated with them in the traditional sense and unlike in the U.S. system, it is current economic conditions, as opposed to a person’s birth year, that determine the total cost he or she will bear in repaying student loans. For example, American students who enter college next year will pay over 6-percent interest on subsidized Stafford loans as opposed to students this year, who will pay only 3 percent. Meanwhile, the economic conditions next year are likely to be similar to current economic conditions.
In Australia, student loans are assessed an up-front fee that has remained relatively constant over the years (just now increasing from 20 to 25 percent). The fee does not increase beyond that, even if the borrower needs to interrupt repayment to pursue an advanced degree, to recover from an economic hardship, or to take time off of work for medical or family leave. There is no interest to accumulate, but instead the current value of the Australian student loan is determined based on the national Consumer Price Index. Loan costs rise and fall based on the annual economic performance of the country, as opposed to the individual student’s personal or professional circumstances.
In Australia, there is no such thing as a grace period, deferment, or forbearance. Instead, there is a minimum threshold income at which student-loan repayment is expected to commence. Currently, that threshold income is around $45,000 per year and as soon as the borrower meets that threshold, whether it is while the student is still in school or even years after graduation, repayments begin. The monthly payment amount is not based on the size or term of the loan, but instead on the borrower’s level of income, with students at the threshold level paying 4-percent of their earnings in loan payments and those earning higher wages paying no more than 8 percent of their earnings. Unlike in our Income Based Repayment program, interest does not capitalize and the total amount due does not increase just because a longer repayment term is in order (unless the economy is so strong that CPI increases dramatically over that period of time, in which case one would assume that wages would maintain a similar rate of growth).
Perhaps most importantly, there are no defaults in the Australian student-loan program. It is the Australian Tax Authority that collects student loan payments, not the Department of Education, and the borrower has the option of either making payments through routine payroll deductions (similar to the way in which Americans pay their FICA and other taxes) or through annual tax assessments.
It would take a significant change in legislation to introduce this sort of student-loan system in the United States, but with sweeping changes coming as a result of necessary deficit-reduction efforts, now may be the perfect time to initiate such a change. It is time that we have a system designed for the students who actually need it—lower income students—as opposed to our current system that advantages the advantaged. In our current system, those who can pay cash or repay loans quickly (or who have parents who can pay cash or assume the loan repayment burden on behalf of the borrower) end up with a college education that costs much less than what a low-income student might pay for the same credential at the same institution since this student is likely to borrow more and repay over a longer term.
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